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GLOBAL ENERGY FACING MILITARY RISKS
Igor Tomberg
http://en.fondsk.ru/article.php?id=1548
1 7.08.2008
The active US and EU diplomacy in the Caspian region, which is mainly
aimed to lessen Russia's influence by constructing a maximal number
of pipelines bypassing its territory, has long ignored the security
dimension of the corresponding projects. Recently the risks surfaced
when Georgia's invasion of South Ossetia threatened to disrupt oil
and gas supplies via the Transcaucasia. The military conflict affected
the energy landscape in the entire Caspian region and - indirectly -
the global oil price dynamics. On August 12, all oil and gas pipelines
traversing Georgia shut down operations due to security concerns. The
view upheld by Russian media is that the situation reflects the
tremendous risks entailed by the efforts of Washington and Brussels
to construct alternative fuel transit routes circumventing Russia.
Georgia has gained greater importance in the oil and gas transit,
especially to Europe, over the past 5-10 years. Besides, it is regarded
as a potential avenue in the framework of several projects of oil and
gas transit from Central Asia to the global markets, including those
of the Black Sea countries. However, Georgia's aggression rendered oil
and gas transit via the Transcaucasia highly problematic. Currently,
analysts estimate the potential disruptions at approximately 1.6 bn
barrels of oil equivalent daily.
Already in the morning of August 11, the price of September futures
for WTI oil at the New York Electronic Mercantile Exchange rose to
$116.9 per barrel, $1.7 beyond the August 8 closing mark. Driven by
concerns stemming from the hostilities in South Ossetia, the prices
of September Brent futures in London and WTI futures in New York New
reached $112.18 and $114.8 respectively.
Oil importers say the supply process has been seriously affected. In
particular, gas supplies from Russia to Armenia via Georgia have been
30% below target. Exporters are complaining that it became impossible
to fulfill contracts and starting to eye alternative markets and
routes. Kazakh companies are looking towards the domestic market
and Azerbaijan is reorienting its export to the Baku-Novorossiysk
pipeline. Momentarily, Georgia became a risky transiter and left
other countries contemplating alternatives.
Somehow, the war in South Ossetia has overshadowed another event of
great significance in the context. Two days prior to the outbreak
of the conflict, fire halted the oil flow on the Turkish section of
the Baku-Tbilisi-Ceyhan pipeline. Responsibility was claimed by the
Kurdish rebels. The fire took a whole week to extinguish and the oil
transit still has not been restored. BP declared a force majeure,
thus freeing itself of contractual obligations to deliver crude. On
August 12, BP closed the pipeline across Georgia used to transit oil
from Azerbaijan to Turkey. At the same time, BP stopped supplying
oil via the Baku-Supsa pipeline which comprises a segment located in
Georgia and links Azerbaijan to the Georgian coast of the Black Sea.
Even though Russian warplanes never attacked pipelines and the
conflict could only tell on marine routes, the reaction of oil
exporters was immediate and far-reaching. The State Oil Company of
Azerbaijan Republic (SOCAR) suspended export via Georgian seaports
and declared that its personnel from the Kulevi terminal would
be evacuated. Subsequently the same course of action was taken by
Kazakhstan.
Somewhat later than Baku, Astana said it would not export crude via
the Batumi seaport. Now Kazakhstan is looking into the possibility
of increasing export to China and Russia, and Azerbaijan intends to
channel greater volumes via the Baku-Novorossiysk pipeline. SOCAR has
already submitted a request to Russia's Transneft to provide greater
capacities at the pipeline.
SOCAR Vice President M. Barkov said the company asked to additionally
pipe 83,000 tons of oil a month (a total of 166,000 tons).
The impression is that the extraordinary circumstances at the transit
routes were not an unexpected development for the oil companies. In
any case, the experience of the past several days will make the
countries of the region assess with greater care the risks inherent
in new transit infrastructure projects and will instill a stronger
sense of loyalty to the already existing routes passing across Russia.
The Azerbaijani export dip is not projected to exceed 0.5-1% of
the global demand and consequently the disruptions are not going to
influence global oil prices to a considerable extent. Nevertheless, as
it is stated in a report circulated by the Troika Dialog investment
company, the conflict is likely to make companies involved in
international oil and gas pipeline projects focus on the risks of
transit across Georgia.
The fact that now Azerbaijan is open to new oil export options and
transit routes worries Poland, which seeks to alleviate its dependency
on fuel supplies from Russia. Warsaw planned to import oil via the
Odessa-Brody-Gdansk-Plock pipeline. Most of the workload for it was
to be provided by Azerbaijan, but the country is already forced to
shift routes as a result of the war.
The conflict can also have an adverse impact on the gas sector. Gas
from Azerbaijan is supplied to Turkey across Georgia via the
Baku-Tbilisi-Erzerum pipeline which has the potential to transit 30
bn cu km of natural gas annually but currently operates below the
planned capacity. Now that the pipeline is not functioning, Baku
is likely to appreciate Gazprom's offer to buy all of Azerbaijan's
export gas at the global price.
Considering the cost of gas transit to Europe via Turkey in the
framework of the pipeline projects which have not been completed
but have conti nuously swelling budgets, competing with Gazprom is
clearly going to be an uphill task. In any case, the risks of gas
transit bypassing Russia are growing, and the situation around the
transit via Georgia is the prime manifestation of the tendency.
At the same time, exotic undertakings like the White Stream project
invented by the team of Ukrainian Prime Minister Yu. Tymoshenko
finally seem dead.
The idea was to construct a pipeline across the seabed and via
Azerbaijan to link Turkmenistan and the Supsa seaport in Georgia, plus
a pipeline across the Black seabed and via the Crimea to the EU. The
Kyiv dreamers even planned White Stream-2 and White Stream-3, but now
the only risk-free route is the one across Russia, and locations like
Supsa or even the Crimea need not even be discussed.
It must be understood that it is not the Russian army who
is responsible for the shutdown of the Baku-Tbilisi-Ceyhan
pipeline. Experts warned about the risks stemming from potential
Kurdish attacks against the transit infrastructure already on the
eve of the Turkish offensive against Kurds in Northern Iraq (October,
2007).
The US plan to partition Iraq and to establish an independent Kurdistan
can easily turn the vast Kurdish-populated region into a zone of
a serious conflict. The offensive against the Kurdish organizations
based in Northern Iraq drew a minimal amount of attention in Western
media at the time it was launched, though t he expression "trans-border
operation" disguised an invasion of a neighbor country. Knowing how
much experience the Kurdistan Workers' Party had in guerilla warfare,
it did not take a prophet to predict that the conflict would be
protracted and would contribute to the risks associated not only with
hypothetic projects like the Trans-Caspian Gas Pipeline and Nabucco,
but also with the existing pipelines such as Baku-Tbilisi-Ceyhan and
the ones linking Iraq and Iran to Turkey. The recent sabotage at the
Baku-Tbilisi-Ceyhan may be the first in a series of bad news.
Central Asian countries will have to base their decisions concerning
the oil and gas transit routes on their understanding of the
general political context. Currently the high risk zones are by
no means limited to the Transcaucasia. For example, obstacles
of military-political character impede the implementation of the
Turkmenistan-Afghanistan-Pakistan-India pipeline project. Since its
830-km segment is supposed to lie in the unpacified Afghanistan where
the NATO forces seem unable to curb rampant violence, a huge question
mark hangs over the entire plan. The tense relations between India and
Pakistan are an additional source of political risks to the project.
Thus, the main conclusion to be drawn from the recent events in
the Caucasus is that the military risks to oil and gas pipelines
are escalating.
Regardless of where the gas comes from - Russia or not E2 in the
post-Soviet space the risks affect any supply routes. As the efforts
of producers to diversify export avenues are confronted by political
and military limitations, it makes sense to return to the time-tested
and stable oil and gas transit routes.
Igor Tomberg
http://en.fondsk.ru/article.php?id=1548
1 7.08.2008
The active US and EU diplomacy in the Caspian region, which is mainly
aimed to lessen Russia's influence by constructing a maximal number
of pipelines bypassing its territory, has long ignored the security
dimension of the corresponding projects. Recently the risks surfaced
when Georgia's invasion of South Ossetia threatened to disrupt oil
and gas supplies via the Transcaucasia. The military conflict affected
the energy landscape in the entire Caspian region and - indirectly -
the global oil price dynamics. On August 12, all oil and gas pipelines
traversing Georgia shut down operations due to security concerns. The
view upheld by Russian media is that the situation reflects the
tremendous risks entailed by the efforts of Washington and Brussels
to construct alternative fuel transit routes circumventing Russia.
Georgia has gained greater importance in the oil and gas transit,
especially to Europe, over the past 5-10 years. Besides, it is regarded
as a potential avenue in the framework of several projects of oil and
gas transit from Central Asia to the global markets, including those
of the Black Sea countries. However, Georgia's aggression rendered oil
and gas transit via the Transcaucasia highly problematic. Currently,
analysts estimate the potential disruptions at approximately 1.6 bn
barrels of oil equivalent daily.
Already in the morning of August 11, the price of September futures
for WTI oil at the New York Electronic Mercantile Exchange rose to
$116.9 per barrel, $1.7 beyond the August 8 closing mark. Driven by
concerns stemming from the hostilities in South Ossetia, the prices
of September Brent futures in London and WTI futures in New York New
reached $112.18 and $114.8 respectively.
Oil importers say the supply process has been seriously affected. In
particular, gas supplies from Russia to Armenia via Georgia have been
30% below target. Exporters are complaining that it became impossible
to fulfill contracts and starting to eye alternative markets and
routes. Kazakh companies are looking towards the domestic market
and Azerbaijan is reorienting its export to the Baku-Novorossiysk
pipeline. Momentarily, Georgia became a risky transiter and left
other countries contemplating alternatives.
Somehow, the war in South Ossetia has overshadowed another event of
great significance in the context. Two days prior to the outbreak
of the conflict, fire halted the oil flow on the Turkish section of
the Baku-Tbilisi-Ceyhan pipeline. Responsibility was claimed by the
Kurdish rebels. The fire took a whole week to extinguish and the oil
transit still has not been restored. BP declared a force majeure,
thus freeing itself of contractual obligations to deliver crude. On
August 12, BP closed the pipeline across Georgia used to transit oil
from Azerbaijan to Turkey. At the same time, BP stopped supplying
oil via the Baku-Supsa pipeline which comprises a segment located in
Georgia and links Azerbaijan to the Georgian coast of the Black Sea.
Even though Russian warplanes never attacked pipelines and the
conflict could only tell on marine routes, the reaction of oil
exporters was immediate and far-reaching. The State Oil Company of
Azerbaijan Republic (SOCAR) suspended export via Georgian seaports
and declared that its personnel from the Kulevi terminal would
be evacuated. Subsequently the same course of action was taken by
Kazakhstan.
Somewhat later than Baku, Astana said it would not export crude via
the Batumi seaport. Now Kazakhstan is looking into the possibility
of increasing export to China and Russia, and Azerbaijan intends to
channel greater volumes via the Baku-Novorossiysk pipeline. SOCAR has
already submitted a request to Russia's Transneft to provide greater
capacities at the pipeline.
SOCAR Vice President M. Barkov said the company asked to additionally
pipe 83,000 tons of oil a month (a total of 166,000 tons).
The impression is that the extraordinary circumstances at the transit
routes were not an unexpected development for the oil companies. In
any case, the experience of the past several days will make the
countries of the region assess with greater care the risks inherent
in new transit infrastructure projects and will instill a stronger
sense of loyalty to the already existing routes passing across Russia.
The Azerbaijani export dip is not projected to exceed 0.5-1% of
the global demand and consequently the disruptions are not going to
influence global oil prices to a considerable extent. Nevertheless, as
it is stated in a report circulated by the Troika Dialog investment
company, the conflict is likely to make companies involved in
international oil and gas pipeline projects focus on the risks of
transit across Georgia.
The fact that now Azerbaijan is open to new oil export options and
transit routes worries Poland, which seeks to alleviate its dependency
on fuel supplies from Russia. Warsaw planned to import oil via the
Odessa-Brody-Gdansk-Plock pipeline. Most of the workload for it was
to be provided by Azerbaijan, but the country is already forced to
shift routes as a result of the war.
The conflict can also have an adverse impact on the gas sector. Gas
from Azerbaijan is supplied to Turkey across Georgia via the
Baku-Tbilisi-Erzerum pipeline which has the potential to transit 30
bn cu km of natural gas annually but currently operates below the
planned capacity. Now that the pipeline is not functioning, Baku
is likely to appreciate Gazprom's offer to buy all of Azerbaijan's
export gas at the global price.
Considering the cost of gas transit to Europe via Turkey in the
framework of the pipeline projects which have not been completed
but have conti nuously swelling budgets, competing with Gazprom is
clearly going to be an uphill task. In any case, the risks of gas
transit bypassing Russia are growing, and the situation around the
transit via Georgia is the prime manifestation of the tendency.
At the same time, exotic undertakings like the White Stream project
invented by the team of Ukrainian Prime Minister Yu. Tymoshenko
finally seem dead.
The idea was to construct a pipeline across the seabed and via
Azerbaijan to link Turkmenistan and the Supsa seaport in Georgia, plus
a pipeline across the Black seabed and via the Crimea to the EU. The
Kyiv dreamers even planned White Stream-2 and White Stream-3, but now
the only risk-free route is the one across Russia, and locations like
Supsa or even the Crimea need not even be discussed.
It must be understood that it is not the Russian army who
is responsible for the shutdown of the Baku-Tbilisi-Ceyhan
pipeline. Experts warned about the risks stemming from potential
Kurdish attacks against the transit infrastructure already on the
eve of the Turkish offensive against Kurds in Northern Iraq (October,
2007).
The US plan to partition Iraq and to establish an independent Kurdistan
can easily turn the vast Kurdish-populated region into a zone of
a serious conflict. The offensive against the Kurdish organizations
based in Northern Iraq drew a minimal amount of attention in Western
media at the time it was launched, though t he expression "trans-border
operation" disguised an invasion of a neighbor country. Knowing how
much experience the Kurdistan Workers' Party had in guerilla warfare,
it did not take a prophet to predict that the conflict would be
protracted and would contribute to the risks associated not only with
hypothetic projects like the Trans-Caspian Gas Pipeline and Nabucco,
but also with the existing pipelines such as Baku-Tbilisi-Ceyhan and
the ones linking Iraq and Iran to Turkey. The recent sabotage at the
Baku-Tbilisi-Ceyhan may be the first in a series of bad news.
Central Asian countries will have to base their decisions concerning
the oil and gas transit routes on their understanding of the
general political context. Currently the high risk zones are by
no means limited to the Transcaucasia. For example, obstacles
of military-political character impede the implementation of the
Turkmenistan-Afghanistan-Pakistan-India pipeline project. Since its
830-km segment is supposed to lie in the unpacified Afghanistan where
the NATO forces seem unable to curb rampant violence, a huge question
mark hangs over the entire plan. The tense relations between India and
Pakistan are an additional source of political risks to the project.
Thus, the main conclusion to be drawn from the recent events in
the Caucasus is that the military risks to oil and gas pipelines
are escalating.
Regardless of where the gas comes from - Russia or not E2 in the
post-Soviet space the risks affect any supply routes. As the efforts
of producers to diversify export avenues are confronted by political
and military limitations, it makes sense to return to the time-tested
and stable oil and gas transit routes.